On August 29, 2013, the Federal Energy Regulatory Commission (FERC) issued three orders assessing civil penalties on, and requiring disgorgement of profits by, Lincoln Paper and Tissue, LLC (Lincoln), Competitive Energy Services, LLC (CES), and Dr. Richard Silkman (Silkman), the managing member of CES. FERC found that Lincoln, CES and Silkman violated the energy market manipulation prohibitions in the Federal Power Act and FERC’s regulations, which make unlawful the use of deceptive or manipulative schemes in connection with FERC-jurisdictional activities. Lincoln owns and operates a paper mill in Maine and CES and Silkman provided consulting services to Rumford Paper Company (Rumford), which also owns and operates a paper mill in Maine. In March 2013, Rumford settled FERC’s market manipulation allegations against it, agreeing to a $10,000,000 civil penalty and to disgorge $2,836,419.08 in profits, but neither admitting nor denying FERC’s allegations.

The August 29, 2013 orders address a scheme to generate demand response payments in the ISO New England Inc. (ISO-NE) Day-Ahead Load Response Program (DALRP) without reducing electricity consumption from the grid. Through the DALRP, ISO-NE compensates certain customers for load reductions as measured against a baseline load established for each facility involved in the program. FERC found that, in 2007 and 2008, Lincoln inflated and CES and Silkman conceived of and assisted Rumford in a scheme to inflate baseline load by uneconomically curtailing on-site or “behind-the-meter” generating facilities to create the appearance of or exaggerate actual demand reductions in later periods. FERC found that Lincoln and Rumford never intended to and did not actually reduce their normal operating demand for power from the electric grid during those periods. That conduct, FERC found, resulted in Lincoln directly and CES and Silkman indirectly, as advisors to Rumford, receiving DALRP compensation for demand reductions that never occurred. FERC also found that the evidence did not reflect that any of the entities misunderstood or were confused about the baseline-setting procedure, their conduct served no legitimate purpose, and all three entities intentionally engaged in a fraudulent scheme or artifice that they recognized and intended would produce DALRP payments without actual load reductions. Citing the seriousness of the violations, the harm to the market, and the lack of any effort to remedy such harm, FERC imposed civil penalties on all three entities and required Lincoln and CES to disgorge DALRP payments in the following amounts:

Penalty

Disgorgement

Lincoln

$5,000,000

$379,016.03 (plus interest)

CES

$7,500,000

$166,841.13 (plus interest)

Silkman

$1,250,000

$0

Commissioner Cheryl A. LaFleur dissented in part regarding the penalties for Lincoln and CES, noting that strict application of the FERC’s penalty guidelines “double-counted” the duration of their fraudulent conduct and arguing that FERC should have exercised its discretion to not apply its duration adder. Commissioners LaFleur and John R. Norris dissented in part regarding the magnitude of the Silkman penalty, noting that while Silkman’s conduct warranted a significant penalty because it threatened the integrity of the DALRP and Silkman and CES should be separately liable, FERC failed to consider the collective impact of the CES penalty and the individual penalty for Silkman, who might, as managing member of CES, have to pay some portion of the CES penalty.

These orders highlight the need for participants in FERC-jurisdictional demand response programs, or who otherwise engage in activities in connection with such programs, to take care to avoid conduct designed to manipulate the baseline determinations under those programs. They also underscore the potential severity of penalties for market manipulation even where relatively little pecuniary gain resulted from the conduct at issue.

The orders are not subject to rehearing at FERC; however, if the entities do not make the required payments, FERC can commence an action in a United States district court for an order affirming the penalties. In such an action, the district court may review the penalty assessments de novo. Press reports indicate that all three entities maintain that they did nothing wrong and plan to challenge the penalties in court. The Lincoln order is available here, the CES order is available here, and the Silkman order is available here. The order approving FERC’s settlement with Rumford is available here.